Clearing The Slate
5 min read
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Final Q2 2023 GDP data shows that the economy was a bit more resilient in the first half of this year than previously thought, even if that resilience might be fading now. The Quarterly National Accounts confirmed that GDP rose by 0.2% quarter-on-quarter in Q2, while the Office for National Statistics (ONS) nudged up its estimate of GDP growth from 0.1% quarter-on-quarter to 0.3% quarter-on-quarter in Q1. Real GDP is now estimated to be 1.8% above its pre-pandemic Q4 2019 level (versus 1.5% previously).
Business investment is now thought to have risen by 4.1% quarter-on-quarter (3.4% quarter-on-quarter previously), following Q1’s upwardly revised 4.0% quarter-on-quarter rise. This reflects businesses bringing forward investment in response to the expiration of the super deduction allowance on 31 March, and so probably won’t last. And while the 0.5% quarter-on-quarter increase in real household spending suggests the cost-of-living crisis is easing, and a 1.2% quarter-on-quarter rise in real household disposable incomes helped the saving rate rise from 7.9% in Q1 to 9.1% in Q2, the growing drag from higher interest rates will probably drag that down.
The underlying sluggishness in the economy was reflected in household lending data for August. Net mortgage lending increased for the fourth consecutive month to £1.2bn (July: £0.2bn), driven by a pick-up in gross lending, rather than a fall in gross repayments. But this was accompanied by a sharp fall in more forward-looking mortgage approvals to 45.4k, the lowest level in six months. Housing market metrics are universally weak, as higher interest rates and increased economic uncertainty weigh on demand.
The Personal Consumption Expenditures (CPE) Price Index for August confirmed what was shown in the timelier Consumer Price Index (CPI) measure, namely that underlying price pressures as measured by the core figure (excluding food and energy) are easing. The core PCE price index increased by just 0.1% on the month in August, the smallest monthly increase since the end of 2020. This left the annual rate at 3.9%, 1.7% points below its February 2022 peak. Headline PCE inflation did creep up, to 3.5% on the year (July: 3.4%), reflecting higher fuel costs.
Seeing as the PCE is the Fed's targeted measure of inflation, it will be reassured by a continued easing in the core measure. It increases the likelihood of the Federal Open Market Committee (FOMC) keeping rates on hold at its next meeting in November, supporting the notion that we have seen the last increase of this cycle.
Eurostat figures provided more encouraging signs that inflation is moderating in the Euro area. At the headline level, the flash estimate of Harmonised Indices of Consumer Prices (HICP) dropped to 4.3%, below the consensus for a more modest drop to 4.5%. This represents the lowest reading since October 2021.
More importantly, core inflation (excluding food, energy, alcohol and tobacco) fell to 4.5%, again beating expectations of a fall to 4.8% from the 5.3% reading in August. With these numbers, the European Central Bank 9ECB) should feel more comfortable that inflation is on a downward path, particularly when looking at the core measure and services inflation, which eased to 4.7%, its lowest since January
Over the weekend in China, the official state-collated Purchasing Managers’ Index (PMI) readings came in marginally higher than forecast, with Services at 51.7 and Manufacturing at 50.2, while the private sector Caixin readings were a bit lower than expected at 50.2 and 50.6 respectively. Both suggest a potentially static underlying economy.
Even so, we saw a rebound in industrial profits in August, with the year-on-year rate jumping from -6.7% to +17.2%, flattered by a low base. The year-to-date year-on-year figure also recovered from -15.5% to -11.7%, and so there is still more ground to recover.
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